The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity.-John F. Kennedy,
Speech in Indianapolis, April 12, 1959
There is much talk and debate about the merits of tax cuts versus increased spending as the policy best suited to confront the current economic crisis in the United States. However, with interest rates for all intent and purposes already at zero everyone from George Will to Paul Krugman recognize that it is fiscal policy rather than monetary policy, that must be changed or adjusted. Moreover, except for the much less than sincere Republicans who, now out of power, have rediscovered their affection for balanced budgets, it is widely accepted that it is not at all the moment to think of austerity. That is, for them. For the gander, not so much. Noam Chomsky notes the hypocrisy.
It is a worldwide crisis and it is very serious. It is striking that the ways that Western countries are approaching the crisis (entirely contradict) the model that they enforce on the Third World when there is a crisis. So when Indonesia has a crisis, [or] Argentina and everyone else, they are supposed to raise interest rates very high and privatize the economy, and cut down on public spending, measures like that. In the West, it is the exact opposite: lower interest rates to zero, move towards nationalization if necessary, pour money into the economy, have huge debts. That is exactly the opposite of how the Third World is supposed to pay off its debts. That this seems to pass without comment is remarkable.
And the vehicle to carry out this hypocrisy is once again a factor. Besides all of the other dreadful effects this economic crisis is having on the poor people and poor countries of the world, another disastrous result has been the reemergence of the IMF.
The global financial crisis has revived the International Monetary Fund, which just a year ago was pushing to sell a chunk of its gold reserves because it was making so few loans it didn't have enough income. Now, it has committed about $50 billion in loans to try to rescue Pakistan, Iceland and a clutch of Eastern European countries.
The Wall Street Journal prefers to label the organization a "new-look IMF" and quotes one of its officials:
"The change reflects a shift away from the thinking that the IMF can micromanage a country," said Anne-Marie Gulde, an IMF senior adviser for Europe.
Yet in the very same article they state:
The IMF is still far from a fast-track loan program for developing nations. Rather, it confines its demands to the monetary and fiscal policy in which it is expert. For some countries, that still can mean difficult changes. Latvia, for instance, must slash the salaries of teachers, soldiers and other government workers by 15%, while Ukraine must cut its spending at a time when the economy is expected to contract severely -- a prescription that is bound to make its recession worse, at least for a time.
Despite some modest improvements in the IMF's terms (see Pakistan) to say I'm skeptical would be an understatement. It all boils to down to what the goals are. The goal for the IMF in the developing world, as the Journal notes, "is to help stabilize poor countries battered by a recession." But stability for whom? Investors, of course.
Obviously third world economies need to grow and to grow they need investment. This is not in dispute. The problem is twofold; first these poor countries absolutely lack the infrastructure and human development to significantly expand the middle class and get the majority of the poor jobs with sustainable wages. Secondly, this is - as acknowledged by most US economists with respect to their economy - the very worst time to slash wages, balance budgets and keep money out of the hands of those who most certainly will spend simply out of need to put food on the table. Krugman, commenting on the Argentine crisis of 2001, put it perfectly:
I.M.F. officials -- like medieval doctors who insisted on bleeding their patients, and repeated the procedure when the bleeding made them sicker -- prescribed austerity and still more austerity, right to the end.
There is little question that today in the United States the Keynesian approach - increased deficit spending in the midst of one of the worst recessions in decades - is favored by much of the ruling class. There are few demanding that the United States, in the midst of its worst economic crisis since the 1930s must suspend its war plans in Afghanistan because it can't afford the cost (though many are opposed for other reasons of course). Health care reform, investment in education and huge infrastructure investment will take place under Obama. Hundreds of billions of taxpayer dollars have gone to the banks and hundreds of billions more are to come. And there are many calls for the government to lend or give the auto industry huge sums of money to keep that industry going and keep those workers employed.
Meanwhile this is what Ukraine must do now to get IMF aid.
Ukraine approached the IMF weeks ago to raise money for its own bailout plan for its banks, something similar to what Treasury Secretary Henry Paulson orchestrated in the United States. The IMF was more than ready for a new client (it eventually lent $16.4 billion), but was concerned about the size of Ukraine's debt-to-GDP ratio. Ukraine's debt was seen as unsustainable at about 30% of GDP. Yet U.S. debt stands at more than 300% of its GDP.
To comply with the IMF's loan conditions, Ukraine will have to cut its annual deficit down from 4.2% of GDP to 1%. Wages will be cut while the cost of essential services such as heating will rise by as much as 35% as fuel subsidies are eliminated. Currency restrictions will also be loosened, meaning that the cost of living will probably go up while the value of the currency falls. Tough times if you're a Ukrainian citizen — unless of course you happen to be one of those banking executives to whom all this money will be going.
As with the case in Pakistan there has been some softening of the IMF approach in Iceland. Iceland, which had replaced Argentina as the poster-child for the IMF after Argentina crashed like no other country had previously, has recently received a 2.1 billion loan with few conditions. French Economy Minister Christine Lagarde said last November:
...many countries feel that the Fund has acted in a "very orthodox and imperialist" way in the past. "The old-school IMF has left some scars,"...
But as I said I'm skeptical because, as the think tank Foreign Policy Focus notes is the IMF raison d'être, "[t]he IMF's policy advice is always designed to reflect the best interest of investors." A few years ago there was a critical report regarding the IMF's role in Argentina.
The International Monetary Fund's handling of the crisis in Argentina three years ago almost certainly deepened a recession that threw millions of Argentines into poverty and sparked political chaos throughout the country, according to a report released yesterday by the IMF's internal audit unit.
By overlooking Argentina's growing indebtedness in the 1990s and continuing to lend the country money when its debt burden had become unsustainable, the fund significantly contributed to one of the most devastating financial crises in history, the report concluded...
On the surface this sounds like the IMF learned its lesson. But did it? The report criticized the IMF's failure to pressure creditors to accept reduced terms in debt repayment yet still makes it clear that it is the investors, not the country nor its people, that are the determining factor in any policy recommendation.
At the same time, the study helps rebut criticism that the fund insists on excessive austerity in developing countries. In Argentina's case, the report concluded that officials were too lenient.
The report also criticized a loan given in 1997, saying it wasn't warranted. Notwithstanding some token comments about how "painful" it would have been for Argentina not to receive the loans, it is still very clear that the IMF more than anything else regrets the debt default that they drove Argentina undertake. It didn't really matter that in the heart of the crisis 10000 people fell below the poverty line everyday or that 30% of the children under 15 suffered from irreversible physical and mental defects due to malnutrition.
No the problem was that Argentina defaulted, the creditors didn't get paid and that the Fund lent money when shouldn't have (let them eat cake). I lived there during the crisis in Argentina and produced a documentary on it. The human cost was devastating. The alleviation of this should have been -but never was - the priority and an institution whose prime role is protecting investors is not capable of dealing with crises like this.
What makes this hypocritical approach to economic crisis even more nefarious is that developing and underdeveloped countries critically need the investment in infrastructure, housing, health and education regardless of whether the economy is in the dumps. In fact, the entire economic history of Latin America demonstrates that there is little hope of ever developing without this investment.
On a related note, while in the current economic climate it seems clear to me that a Keynesian approach, as opposed the tax cutters and the truly loopy supply siders, is the far superior policy to deal with the US economic crisis, I don't feel even here that there is nearly enough attention to what the money is being spent on.
John Cole, while expressing his pessimism on the bail out package, stated:
I am not sold on the current stimulus bill and seriously doubt it will accomplish anything. I am pretty much of the opinion we have passed the point of no return and are on the way to the bottom, and nothing is going to stop the slide. What should be the focus is restructuring the foundation once we crash completely, and making sure we put in place regulations and rules so that this never happens again.
But back to the point- if we are going to piss away trillions, I would like some bridges, roads, and other things that can serve us for the next century. I find it appalling that there is no real money for high speed rail or mass transit. Why are we not re-doing the entire power grid and throwing up nuclear plants?
We may be a “wealthy” nation, but we seriously [sic] have third world governance.
My point is that if the money is spent wisely on areas that clearly need investment and development then by definition it is NOT pissing away the money. In the same post Cole notes the need for infrastructure investment in the United States:
Because decades of underfunding and inattention have endangered our nation’s infrastructure, $2.2 trillion in repairs and upgrades is needed over the next five years to meet adequate conditions. That’s the conclusion of ASCE’s new 2009 Report Card for America’s Infrastructure, released today, which assigns an overall grade of D to the nation as well as individual grades in 15 infrastructure categories. Since ASCE’s last assessment in 2005, there has been little change in the condition of America’s roads, bridges, drinking water systems, and other public works.
The old cliche about spending on what, guns or butter, is still very relevant. It always matters what the money is spent on and the needs of society must be paramount. We can't forget that the economy is to serve the people, not the other way around. And given the state of poverty and human suffering in much of the third world this is even more the case there.
Finally I have to take exception to Cole's last statement. The "governance" that has kept much of the third world underdeveloped and overly dependent comes from the same power structure that deregulated the U.S. economy and led to this crisis. Their concern is and has always been personal and institutional enrichment and power. They don't give a damn about the unemployed auto worker in Detroit nor the starving family in Pakistan.
For most of us this system is known as neo-liberalism and in this crisis lies opportunity; the opportunity to invest in society and its people and to finally allow neo-liberalism to permanently join its mirror image, communism, in the dustbin of history's failed economic models.
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